A New Jersey Appeals Court on Friday ruled that a state law prohibiting lawyers from engaging in debt adjustment activities on behalf of their clients is unconstitutional. The ruling is a significant victory for attorneys practicing in the area of debt adjustment, as it removes restrictions on their ability to provide services to clients seeking debt relief.
The background: The case stemmed from an investigation by the New Jersey Office of Attorney Ethics (OAE) into a law firm that was representing debtors in bankruptcy and collection cases. The firm faced disciplinary action for allegedly violating the Debt Adjustment and Credit Counseling Act (DACCA). DACCA limits for-profit debt adjustment activities, requiring debt adjusters to be licensed by the Department of Banking and Insurance (DOBI). However, the law includes an exemption for attorneys, provided they are not “principally engaged” in debt adjustment services.
- The statute, though, failed to define what constitutes being “principally engaged,” leading to ambiguity and uncertainty about what activities are permissible.
- As a result, a lawyer and his firm filed a lawsuit challenging DACCA, arguing that the law infringes on their constitutional rights, particularly the separation of powers doctrine. They contended that the law unlawfully encroached on the Supreme Court’s authority to regulate the legal profession.
- A state court judge sided with the OAE, which the firm appealed.
The ruling: The Appellate Division of the New Jersey Superior Court ruled that the “limited attorney exemption” in DACCA was unconstitutional. The court found that the exemption violated the principle of separation of powers by undermining the judiciary’s exclusive authority to regulate the legal profession. The court also ruled that the term “principally engaged” was overly vague, failing to provide sufficient guidance to attorneys on what constitutes a violation of the law.
- Judge Jack Sabatino, writing for the court, emphasized that the statute’s application could penalize lawyers who specialize in debt adjustment, thus discouraging attorneys from pursuing this valuable area of practice. The court’s decision noted that by restricting attorneys from engaging in debt adjustment activities, DACCA could harm the public by limiting access to specialized legal services.
- The court’s ruling effectively reinstates the broad exemption for attorneys that existed before 1986, when DACCA was amended to limit the exemption for lawyers “principally engaged” in debt adjustment.
- The ruling clears the way for lawyers to engage more fully in debt adjustment without the threat of criminal or civil penalties under DACCA. As the court observed, the legal practice of advising clients on debt modification, settlement, or bankruptcy is an essential part of an attorney’s work, and restrictions on such services could harm clients in need of assistance.
- While the ruling strikes down the attorney-specific provisions of DACCA, the remainder of the statute remains intact, and any future legislative changes would need to address the separation of powers and vagueness concerns raised by the court.
